NewMarket Corp (NEU) 2014 Q2 法說會逐字稿

Greetings, and welcome to the NewMarket Corporation's second quarter 2014 financial results conference call. (Operator Instructions) A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, David Fiorenza, CFO. Thank you. You may begin.

Thanks, Jessie, and thanks to everyone for joining our newly elected Chairman, Teddy Gottwald and me today to discuss our second quarter performance.

As we announced yesterday, Teddy was elected Chairman of the Board. And Mr. Charles Walker was elected Independent Lead Director. Teddy is succeeding his father Bruce, who will remain on the Board.

We are much appreciative and fortunate to have had Bruce as our Chairman for the last 20 years. During his tenure, we have seen good times, tough times and good times again. The 400% growth in EPS under his reign, mentioned in the press release, is very impressive.

Teddy has been a Board member for 20 years. So there will be no discontinuities with understanding our business or how we do business. Again, we thank Mr. Bruce Gottwald for his innumerable contributions.

As a reminder, some of the comments we will make today are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We believe we base our statements on reasonable expectations and assumptions within the bounds of what we know about our business and our operations.

However, we offer no assurance that actual results will not differ materially from our expectations due to uncertainties and factors that are difficult to predict and beyond our control. A full discussion of these factors can be found in our 2013 10-K.

We filed our 10-Q earlier this morning. It contains significantly more details on the operations and performance of the Company. Please take time to review it.

I will be referring to the data that was included in last night's release.

Net income for the quarter was $66.8 million, or $5.24 a share. For the first half, net income was $124.3 million, or $9.66 a share.

Net income for all periods included the impact of valuing an interest rate swap at fair value, while both periods of last year included the results of the operation of a discontinued business. The information, excluding these items, is also detailed in the release.

In summary, excluding these items, we made $5.35 a share this quarter, compared to $4.61 per share in last year's second quarter.

Petroleum additives net sales for the quarter of $618 million increased $36 million or about 6% in the quarterly comparison. This quarter, each of the major regions in which we operate had increased revenue. Shipments of all petroleum additives products also increased about 7% in the comparison.

We are enjoying good success in growing our business in the emerging markets, where the growth rate expectations are higher than the mature markets.

There was a continuation of a high level of activity within the quarter, as we continued to prepare for increased capabilities to service our customers. The record volumes posted this quarter are a further testament to the trust our customers have placed in our ability to help them grow their business.

We had our formal groundbreaking in Singapore at the site of our new manufacturing facility to be built there. We expect this plant to be operational in late 2015, with commercial shipments beginning in early 2016. We have already begun working on planning for the expansion phases after this initial phase.

This initial phase will add detergent capability, capacity and basic plant infrastructure. We expect to be investing in this plant site for the next several years.

The petroleum additives operating profit increased $11 million in the quarterly comparison.

The explanation of the quarter is quite simple. It was mainly driven by increased shipments. The increase in shipments was 7% ahead of last year, as I've already mentioned, and 7% higher than the first quarter of this year. This performance resulted in petroleum additive segment operating profit being $5.5 million ahead in the year-to-date comparison of profit.

The operating profit margin for the quarter was 17.7% and 17.2% for the 6 months of this year. For the four quarters ended June of 2014, the operating margin was 16.4%, which is in line with our expectations of the performance of our business over the long term.

As you know, our operating margins will fluctuate from quarter to quarter due to multiple factors. And we don't operate differently from quarter to quarter. We believe the fundamentals of our business and industry are unchanged. We continue to focus on developing and delivering innovative technology-driven solutions to our customers.

S&A and R&D were relatively flat in all comparisons. We expect this comparison will change in subsequent quarters, as we spend more money on R&D in support of our customers' programs.

Other income was an expense of about $2 million for the second quarter, compared to $5 million of income last year's second quarter. These are related to our interest rate swap.

There's nothing of note in the income tax expense for the quarter, as the effective tax rate was 31.8%. In the 6 months comparison, however, the rates are quite different, with 6 months this year being 31.6% and last year being 29.5%. Last year's first half included the benefit of six quarters of the R&D tax credit, while this year's contained none.

Congress has not yet passed legislation with respect to restoring the R&D tax credit for research activity.

Cash was $114 million at the end of the quarter, which is a decrease of $125 million since December 31. Our business continues to generate significant amounts of cash, which affords us great flexibility to execute our business plans.

For the quarter, there was nothing exceptional to call out that is not detailed in the attachment to the press release. Excluding our repurchase activity, we are about $34 million cash positive for the 6 months that ended in June.

Our capital expenditures remain relatively low, but we expect that to change at a significant rate over the next six quarters, as we have started construction at our Singapore facility. We believe the capital expenditures will be in the $80 million range for this year and to be in the $125 million range for both 2015 and 2016. This additional spending is to support the increased volume needed by our customers.

During the quarter, we repurchased 222,000 shares of our stock for about $86 million, which averages $[386] a share. At the end of June, we had about $338 million remaining on our stock authorization, and we had 12.6 million shares outstanding.

Our debt to EBITDA was under 1 at the end of the quarter, as we continue to operate with modest leverage.

Our petroleum additives segment is on track to again deliver solid results in 2014. We have not changed our long-term view of the growth of the demand of this industry. Over the long run, we plan to exceed that growth rate.

Over the past several years, we have made significant investment, and will continue to do that, in order to expand our capabilities around the world. These investments are in people, technology, technical centers, and production.

We intend to use these capabilities, along with the new investments mentioned above, to improve our ability to deliver the goods and services that our customers have come to expect from us, and to grow shareholder value.

That concludes my planned comments. Jessie, can we open the lines for questions?

Absolutely. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. (Operator Instructions)

Ivan Marcuse, KeyBanc Capital Markets.

In terms of the volume, continue to draw some pretty strong volume, despite -- it seems like the customers that report (inaudible) down. And everyone else in the industry are growing are pretty low growth rates.

So how sustainable do you think these mid-to-high single-digits in several quarters now -- I know it's not a one-off type of thing -- are for you to keep it up? And is there a certain market or a certain technology where maybe you've taken some share or you're growing at a rate significantly higher than the overall market?

As David said, we think the market, over the long term, is growing at, let's call it 2%. In the more recent term, the short-term growth may have exceeded that for the market. It's a little hard to say, as there's been some recovery from the down years. Every indication for us is that a number of our customers are growing their volume.

As we've said in the past, our presence historically has been -- or our market share has been greater in North America and Western Europe than in the rest of the world. And we've put a concerted effort to grow in the geographic areas where our presence has lagged. And that growth -- that activity is paying off, and we're seeing growth in those regions -- Asia Pacific, in particular.

We've also seen some product line expansion efforts pay off. Those are harder to see in the overall volume because they tend to be smaller areas than the engine oil area. But still, it's an important bit of progress for us.

So it's a combination of factors. We've stated that we hope to exceed the industry growth rate over time by a couple of percentage points. And we feel that that is sustainable for us.

Do you think that you're -- I know you're adding capacity to Asia. And I know Asia is the Asian region and really where the growth -- it's where a lot of your growth is relative to North America and Europe. However, (inaudible) that there's been a lot of capacity added in that region over the past couple of years and also, looking forward over the couple of years.

Do you think these investments that everyone is making in this region, in a market that maybe instead of grow 1% to 2%, is going to grow 3% to 4%. Is this going to increase to a more competitive industry or change the dynamics that we've experienced over the past, call it 7 to 10 years? Or do you think the demand out there is enough to absorb all this capacity or investment that all the additive makers are investing in the region?

We think even at 1%, 2% growth, the industry needs additional capacity to keep up with demand. And we're all running pretty tight right now, I believe. And I don't believe that the announced capacity addition to the ones that have come on shift the competitive picture from the way it is now. We're all running hard and the industry needs more capacity.

Got it.

So it needs the capacity that's coming on.

But lastly -- and I'll jump off here -- is that, from my understanding, there was price increases announced in the first half of this year in the additive industry; that pricing for you or it may be a function of mix or down a bit for the first 6 months.

Would you expect that to reverse in the second half or with raw materials being benign, maybe the price increases haven't been all that successful?

We've given you all an indication that our margins will be in the mid-to-upper teens. That's where we've seen them and that's where we expect to continue to see them.

Got it. All right. Thanks very much for taking the time.

Todd Vencil, Sterne, Agee.

You mentioned spending more on R&D. Should we be thinking -- first of all, to set this down, do you think about it in terms of percentage of your top line? Or is it just more of a general absolute amount that you're looking at as you think about it?

And the second question is how to approach it then is on either basis, how much of a step-up are you looking at in R&D?

We generally build our R&D budget from the ground up, looking at what's needed to support our customers and what's needed to support our improvements in technology.

R&D, David, do you want to comment on the increase?

Yes, Todd, if you look back historically, I think R&D has probably grown in a 7% a year rate. And our indications, most of the time, is you should think of R&D growing at inflation-plus, so whatever that means to you. If we have 3% inflation, maybe R&D grows at 5%.

And as Teddy said, it's project-dependent and there's no real clue to look at a quarter. But over longer periods of time, it's inevitable that it's going up.

And we look at it in terms of percent of sales, but we don't set it based on that. As I look forward at our plans, there are going to be years where we'll see the increases faster than other years. I think the next couple of years, in particular, we'll see increased spending.

We have a lot of opportunities that we're looking at, a lot of new technology, and also, some new spec changes that are coming for the industry. And even though changes in specifications are just a ticket to the game, and not what drive our products, big changes in industry specs tend to drive heavy investment in R&D to meet them.

That makes sense; that makes a ton of sense, thank you.

Then the only other question -- and this is going to be speculative, but I guess I'll ask it anyway. As you mentioned, your leverage is sub-1. I know you're spending money on the buyback; I know you're spending money on the R&D.

Where would you -- any thoughts on where the Board might be in terms of special dividends or other uses of capital beyond -- and again, you've got the cap ex coming up, so it's not like you're not spending money. But just any thoughts as you continue to delever over time?

Certainly, our view is consistent with our behavior of the last few years. We still see investment -- reinvestment in the business as the primary use. We've mentioned that, stepping up this year and over the next couple.

We're still out there looking for acquisitions, mainly focused in petroleum additives -- almost exclusively focused in petroleum additives. And that's a preferred use of cash, but they're few and far between.

Certainly looking at our regular dividend, special dividends and buybacks are all tools that we use and have used. And we'll continue to consider all of the above.

Got it. Thanks.

Edward Yang, Oppenheimer.

Teddy, just to follow up on your answer right there, when I look at your dividend payout as a percentage of your earnings, that's risen fairly steadily. From 2009, it was about 10% of your earnings per share. Last year, it went up to 21% of your earnings per share.

Is that a metric that you look at? And longer term, would you like to grow that? And what's the level, a dividend payout ratio, that you'd be comfortable with?

Yes, it's something we look at and we talk about. As you rightly point out, it has risen and that's been a conscious effort on our part. We'd like to see it in the 20% to 30% range.

We're having discussions around what's the appropriate level. Is that still the right range we should be considering? And at what rate do we get it up toward the higher end of that range? But yes, it's certainly part of our consideration.

Okay. And maybe a question for David -- just also on the fluctuations in the quarterly shipment rates that you're seeing, is there anything to read into that? Can you talk a little bit more about the cadence of customer order patterns?

Last year, you had a couple of quarters that were up a lot, and then a couple of quarters that were meager and they evened out. Are you seeing anything change in terms of customer inventory patterns?

No, I can't cite anything. We view this as pretty much a normal variation in the patterns of this business. I can't read anything into it.

All right, fair enough. Thank you, gentlemen.

Dmitry Silverstein, Longbow Research.

Can you talk a little bit about your raw material situation and (inaudible) in light of lower pricing that you delivered in the quarter? What the year-over-year comps look like and what do you expect for the second half of the year in terms of raw material pricing?

Our near-term outlook for raw materials is flattish. But I think you should really focus on what Teddy mentioned earlier, in that we're comfortable talking to you about operating profit margins and that our business is operating in that range. And we expect it to continue to do so.

As you look out longer term, let's say, to 2015 and beyond, is there anything going on in the industry that would lead you to believe that, outside of the crude oil pricing, that raw material may be moving one way or the other for you as a longer term planning tool?

No, Dmitry. As a matter of fact, as Teddy mentioned a second ago, we just finished our planning cycle. And our planning cycle is around flattish for raw materials for the next several years.

Fair enough. Then for an extra question for Teddy -- you mentioned continuing to work on M&A and looking at petroleum additives as an area of focus. It's been many quarters since the last small deal you did.

Can you update us on what's in the hopper and how should we think about M&A over the next 12 months? Is it a high probability or opportunistic low probability type of event?

I think you should look at any acquisitions being fairly low probability. And the ones that are most likely would be incremental and small in nature, nothing earthshaking, say, under $100 million in purchase price.

Okay. Okay. That's helpful, thank you.

Thank you. (Operator Instructions) And since there are no further questions at this time, I would like to turn the floor back over to management for any additional concluding comments.

I don't have any closing comments. I appreciate everyone joining us and we'll talk to you next quarter. Have a good day.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.

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